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Russia Looks to Follow World's Biggest Wealth Funds Into Stocks

(Bloomberg) -- Russia, which modeled its sovereign wealth fund after Norway’s more than a decade ago, now wants to take a page from its counterparts elsewhere to take on more risk.

The world’s biggest energy exporter may need another couple of years to rip up its investing blueprint, but it’s preparing for a shift after suffering through years of meager returns. Once the share of liquid assets in the National Wellbeing Fund reaches 7 percent of gross domestic product, the range of investments could be broadened to include stocks, bonds and traded securities, according to Finance Minister Anton Siluanov.

“Such investment practice is widespread among the managers of the biggest sovereign funds,” Siluanov said in an interview. The proportion of assets deemed “risk-free” may rise to about 5 percent of GDP this year from the current 3 percent, he said.

Russia is developing an appetite for risk as it restocks its state coffers as crude prices recover. Last year, the authorities resumed funneling windfall revenue from oil and gas into reserves. Under current rules, money in the $66.4 billion National Wellbeing Fund can be invested in sovereign debt, deposits at state development lender Vnesheconombank, and infrastructure projects. The fund is managed by the central bank in accordance with Finance Ministry guidelines.

By comparison, Norway’s $1 trillion wealth fund was given the green-light last year to raise its stake in stocks to 70 percent of its portfolio in a bid to increase returns amid record low interest rates. Its other holdings include bonds and real estate.

No Gain

Russia lost money on its holdings of foreign sovereign bonds last year, reaping only 1.3 percent in total since 2008, when the National Wellbeing Fund was created. After draining another sovereign pool of savings, used to patch up shortfalls in the budget, the remaining reserves were merged with the National Wellbeing Fund starting this year.

The share of risk-free assets is set to rise if the ruble’s exchange rate and oil prices remain at current levels, allowing the Finance Ministry to spend about 2 trillion rubles ($35 billion) on foreign-currency purchases, according to Siluanov.

One condition for any new holdings is that, if needed, Russia should still be able to sell them quickly, he said. The finance minister added that the 7 percent target for liquid assets in the fund is “not much, a bare minimum.” That level is mandatory under Russia’s budget law.

Meanwhile, the equivalent of almost 2 percent of GDP from the fund’s cash is allocated toward infrastructure projects after President Vladimir Putin ordered such investments in 2013. The Finance Ministry doesn’t plan to revise the fund’s basket of foreign currencies, which now includes the dollar, the euro and the pound, according to Siluanov.

‘Significant Decline’

Russia needs enough money stowed away in the National Wellbeing Fund to weather a possible decline in oil prices to about $30 a barrel, he said. The amount of risk-free assets will be considered “comfortable” if it allows the budget to meet it all its liabilities for three years despite a “significant decline” in crude prices, according to Siluanov.

The government currently diverts the excess revenue from oil prices above $40 per barrel to reserves under the so-called budget rule.

That’s helped ensure Russia’s readiness for a possible slide in oil after the Organization of the Petroleum Exporting Countries and its partners exit their agreement on output curbs, Siluanov said.

“Russia adopted the budget rule and that way has already prepared for the end of the deal of OPEC+,” he said. “We have the National Wellbeing Fund, the central bank has high foreign-currency and gold reserves. We don’t expect any difficulties even if oil prices fall significantly.”